“At the time, it was a reasonable amount of debt but, as we all know, the market has changed profoundly,” Ziff Davis CEO Jason Young [above, right] told FOLIO: in an interview late Wednesday. “We transformed our business with the market but the problem was that we still had this capital structure and debt load that didn’t fit our business anymore. This announcement [Chapter 11] marks the final steps towards securing a platform that allows Ziff Davis to not only organically grow and thrive, but to grow even faster.”

Young was tapped for the top spot last August, replacing Robert Callahan. Ziff Davis Media publishes PC Magazine and ExtremeTech.com.

‘Excellent Chance’?

Perhaps surprisingly, industry observers—some of whom viewed Ziff’s financial troubles as the “beginning of the end”—are, for the most part, viewing yesterday’s bankruptcy as a positive one. “Everyone has known for years that Ziff owed more debt than the company was worth,” says Reed Phillips, managing partner of DeSilva + Phillips. “It’s been tough going for the company but they’ve stuck it out—this move gives the company an excellent chance at surviving and rebuilding.”

Tom Kemp, managing partner at Veronis Suhler Stevenson, agrees. “Clearly this wasn’t a move they wanted to make but, by carrying an unsustainable capital structure and a debt load of that magnitude, it was inevitable,” he says. “The business has continued to trade down, especially in print. Eventually, if the company survives this period and is not abandoned by its customers, they will hopefully come out the other side with a capital structure that’s appropriate to their level of business, and they will be successful.”

According to the announcement, an ad hoc group of senior secured note holders has agreed to pay up to $24.5 million, in what Young calls “go-forward equity,” to fund the company’s operations during and after the Chapter 11 case. A major obstacle, though, is that the company was not able to reach an agreement with its junior note holders. “They weren’t in disagreement on the notion of the business being delivered or being given capital to continue to drive digital growth,” he says. “On the other side of this, they simply were in disagreement over how much equity they would get. As hard as we’ve tried to consensually get these guys to a reasonable split, it just wasn’t happening. Now, the court will have to answer this question.”

Young hopes Ziff will emerge from the Chapter 11 case sometime this summer. It remains to be seen if that is an overly ambitious expectation.

“Ziff is taking its chances with the Chapter 11 filing, waiting to see what the judge decides,” says Kemp. “It’s a timely, costly process that puts the company at risk in terms of employees, vendors and customers. Bankruptcy courts have responsibilities to the creditors. The only people who really benefit are the lawyers and the restructuring specialists.”

Getting to an ‘End Game’

Since the acquisition in 2000, Willis Stein & Partners has been trying to recoup some part of its investment, which has not been an easy process. In the fiscal year ended March 31, 2001, Ziff Davis Media reported revenue of $430 million after produced $535 million in 1999.

Ziff’s revenues took a dramatic decline following the dot-com debacle. In 2002, the company produced $209 million, with 99 percent of its revenue from print. In 2006, the company produced revenue of $181 million and EBITDA of $27.1 million, up significantly from the $17 million in 2005.

Last June, the company sold its Enterprise Group to private-equity firm Insight Venture Partners for $150 million. Two months later, Ziff announced that it was exploring options to restructure its debt and would not make a scheduled interest payment on its senior subordinated compounding notes due in 2009. The company retained corporate turnaround and bankruptcy specialists Alvarez & Marsal and Kirkland & Ellis LLP as advisors as part of the restructuring plan.

“[Yesterday’s] announcement is an effective tool that gets us to our end game,” Young says.

Young declined to disclose the company’s actual revenues but indicated that fourth quarter 2007 digital revenues grew 25 percent and its digital audience grew 30 percent. Although the company could “scale back or discontinue certain assets that no longer have a level of demand or economics that make sense,” for now, Young says, there are no layoffs planned in association with the debt restructuring.

“This has never been about our operating business—it’s about our capital structure,” Young says. “The true assets of this business go up and down in the elevators everyday.”